Tax Type
Corporation Income Tax
Description
Classified as a "financial corporation"
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Date Issued
10-01-2004
October 1, 2004
Re: Request for Ruling: Corporate Income Tax
Dear *****:
This will reply to your letter in which you request a ruling regarding the proper apportionment method to be used by ***** (the "Taxpayer") for Virginia corporate income tax purposes.
FACTS
The Taxpayer is a Virginia corporation that purchases and collects defaulted consumer debt from unrelated third parties. You represent that the defaulted consumer receivables are accounted for using the interest method. Under this method, the receivables are recorded at cost and income is accrued based on an effective interest rate. You request a ruling from the Department as to whether the Taxpayer may be classified as a "financial corporation" for Virginia corporate income tax purposes, thereby allowing the Taxpayer to use the cost of performance method of apportionment pursuant to Va. Code § 58.1-418.
RULING
Virginia Code § 58.1-418 provides in pertinent part:
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- A. The Virginia taxable income of a financial corporation, as defined herein, excluding income allocable under § 58.1-407, shall be apportioned within and without this Commonwealth in the ratio that the business within this Commonwealth is to the total business of the corporation. Business within this Commonwealth shall be based on cost of performance in the Commonwealth over cost of performance everywhere.
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- B. "Financial corporation" means any corporation not exempted from the imposition of tax under the provisions of § 58.1-401, which derives more than seventy percent of its gross income from the classes of income enumerated in subdivisions 1 through 4 below, without reference to the state wherein such income is earned, including but not limited to small loan companies, sales finance companies, brokerage companies and investment companies:
1. Fees, commissions, other compensation for financial services
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- rendered;
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- 3. Interest; and
4. Dividends received to the extent included in Virginia taxable income.
- 3. Interest; and
In this case, the Taxpayer has purchased defaulted consumer receivables at a discount and earns revenue when the receivables are collected. The gain on collections of receivables is not included in the classes of income required to qualify as a financial corporation. The fact that the Taxpayer uses the interest method to account for the revenue does not change the underlying activity. Based on the information provided, the Taxpayer generates more than 95% of its revenues from the gain on collections of receivables. Accordingly, the Taxpayer is not a financial corporation as defined under Va. Code § 58.1-418 and cannot use the cost of performance method of apportionment for Virginia corporate income tax purposes. Instead, the Taxpayer must apportion its income using the three factor apportionment method as described in Va. Code § 58.1-408 et seq.
The Code of Virginia sections and public document cited, along with other reference documents and forms, are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this ruling, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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Sincerely,
Kenneth W. Thorson
Tax Commissioner
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AR/51340B
Rulings of the Tax Commissioner